What’s wrong with the cement industry?

ABOUT the cement industry-which is so essential to our country’s physical and infrastructure development and yet so unsatisfactory as it is now-the Aquino administration must do better than the previous one.

The first task is to know the truth about the industry. Is there really a cartel? Have the three foreign-owned cement manufacturing corporations formed a unity to manipulate pricing? What is the real demand? What should the fair price of cement be?

This is a major issue because the big complaint against the country’s cement makers-which are controlled by Holcim, Lafarge and Cemex-is that our cement prices are much higher than those of the other countries in our region. But according to the Cement Manufacturers Association of the Philippines (Cemap), that public belief and government allegation is not true. Cement here is cheaper than in other countries abroad. We are, from the top (most expensive), No.

5, not No. 1 or No. 2 most expensive. Cemap claims that our cement price is cheaper than that of Brunei, India, Indonesia and even Japan.

Cemap says the one big reason we can’t have cheaper cement than we have now is the cost of power. They say when you buy cement, you are practically buying electric power or coal power. For 40 percent of the total cost of manufacturing cement in our country is made up of the cost of electricity.

Also, Cemap complains-just as other manufacturers of anything in our country complain-that the government’s failure to control the smuggling of cement has forced the local cement makers to sell their product at a loss just to maintain their market share and not lose the market entirely to the smugglers.

Cemap also contends that their critics’ and the government’s basis for computing the low price of cement is wrong. They (the critics and the government) use as base the prices when various factors some years ago made cement prices in our country drop to P100 per bag and even lower.

Government’s viewpoint

Against the Cemap’s defense of their industry against allegations of their being greedy and maintaining a price and supply cartel, the government makes these claims:

1. The Board of Investments (BOI) says our cement price is roughly $4.56 per 40-kilo bag as of early this year, higher than the $3.63 average for nine countries in the region. Today, the DTI says a 40-kg bag costs around P210 to P220.

2. We are next to Indonesia in having the most expensive cement. Indonesia’s cement price is $4.62 per bag, followed ours which is nearly the same as the price in Japan.

3. Philippine cement cement prices are 66 percent more than Vietnam’s, 20 percent more than Malaysia’s, and about 40 percent higher than Thailand’s.
From what has happened since the 1980s, when our government began following a “neo-liberal policy”-which liberalized every industry (in other words, freed them from onerous regulations) and allowed foreign multinational companies to own and take complete control of entire industries-the domestic price of cement has not decreased. The claim of policymakers is that liberal policies will benefit the consumers because of the lower prices they have to pay for products. That has not happened in the cement industry, which as said above is now controlled and owned by three foreign firms.

Then the government also claims to have seen, as academics who surveyed and researched the field did see, that the local cement manufacturers “are characterized by collusive behavior to manipulate local prices.” That they “engage in strategic behavior and use anti-dumping and safeguard measures” (that are meant to protect them from dumping) to maintain their high prices.

To force the Big Three to drive their prices down-and help lower the cost of infrastructure and homebuilding-the government has begun to offer incentives to new entrants in the cement manufacturing industry.

To break the price cartel, the government is giving incentives to Eduardo Cojuangco’s new Eagle Cement Plant in Bulacan. The plant is expected to cost P6.73 billion and produce 1.08 million MT or 26.6 million bags of Portland cement. Eagle Cement says it will sell its cement 25 percent cheaper than the current prices of cement from the Big Three.

The government is allowing Eagle to import without duty the capital equipment to be used by the plant. It will also be given an income tax holiday for four years.

Eagle Cement, a wholly-owned Filipino company, was scheduled to start production in January after putting its operation on hold due to destructive typhoons that hit the country in 2009.

BOI said Eagle Cement has requested for the amendment of the timetable. The company was supposed to begin operations in December 2009 but asked for a one-year postponement because of the typhoons.

The Eagle Cement plant will service consumers in Nueva Ecija and Nueva Vizcaya because it is located in Bulacan but there is no reason for it not to sell in Metro Manila.

The BOI will give the same incentives to others who will invest in cement-manufacturing.

Demand estimates
The Arroyo administuration’s Medium Term Philippine Development Plan (2004 to 2010) calculated the then existing supply of 462 million bags in 2005 to stay at that level until 2012. But beginning this year, demand will increase to 491 million bags in 2011 and 550 million bags in 2012.

This means there will be a supply deficit of 29 million bags this year 2011 and 88 million bags in 2012. Unless more supply comes from the Big Three, there will be a serious lack of cement for the planned roadbuilding programs of the Aquino administration and the real estate industry’s projected growth in construction.

But the Big Three are complaining. They say that they could in fact fill the supply deficit because their plants are not being operated at full capacity. Why? They claim that the local demand is so low.

So we go back to our first question: Who to believe?